Here’s this week’s sentiment commentary:
LowRisk is showing the most positive picture with bulls falling to 29.4%. In contrast, AAII bulls are at 49% and the II bulls at 55.6%. I don’t know about you but I’ll take the latter surveys over the one exception.
It isn’t surprising to see the AAII bulls jump so high, so fast. After all, even in the darkest days of August, their pessimism was guarded. They never really got spooked. Now that the market has recovered, they’ve jumped on again. From a contrarian perspective, that doesn’t bode well for the market going forward.
Narrow Range & Low Volatility
Since I suggested to sell something, the market has entered a narrow range, meandering with no conviction. The rhythm of the markets is such that expansion tends to be followed by contraction. Just as you need to breath out, before you can breath in again.
Volatility (VIX) which spiked to 37.50 just a month ago has collapsed to less than half. That doesn’t automatically mean that the market can’t continue to climb. Remember, low volatility has no correlation to market behaviour (as opposed to volatility spikes). What it does tell us is that the low risk opportunity to buy was back then when the VIX spiked, not here — click to see a long term chart of the relative VIX index.
Magazine Cover Indicator
Here is this week’s Economist magazine. The gun has an inscription “Made in America” - implying that the credit crisis began in the US and as the trigger is being pulled, it will “trigger” a new downturn. At least, that is the question the cover is asking rhetorically.
There is no question that this cover is negative but the metaphor of a gun being pulled is a bit awkward so I’m not sure if it qualifies as one of the classic magazine cover indicators.
In any case, as a contrarian indicator, I would interpret this mildly bullish for the market and for the whole credit mess. I think the worst is behind us. The market still needs to mop up the mess and that will take time, but it doesn’t make sense to wallow in fear and loathing about something when it is on the cover of magazines and when journalists are writing related articles at the fastest clip ever.
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